The economy is like a sinkhole. When there is pressure on one part, it bulges in another place. A relationship that demonstrates this perfectly is the relationship between inflation and the employment rate. Now I could tell you that if you look at a Phillips curve, which is the graph we use for inflation, with inflation on the y axis and the employment rate on the x axis, we are at a place on the graph where we are asymptotic to the y-axis, approaching infinity. We don’t do that here because it’s just a bunch of nonsense and nobody needs that negativity in their life. But we have to talk about what it tells us. This means that the unemployment rate is at a point where it is driving up inflation.
Let’s first define unemployment. Unemployment is the percentage of active workers in the labor force who are looking for work. The natural unemployment rate is when this percentage is as low as it can be without creating inflation. Traditionally, this is between 4 and 6%. The unemployment rate right now is below that, so like clockwork, we are experiencing high inflation rates.
Let’s talk about why this relationship exists. To do this, we must revisit our old friends, supply and demand. We all need people to provide services and make the things we use. When there aren’t enough workers, we all want access to the same things we always have. We’re still asking for the same amount of labor, but the supply has gone down. We are willing to pay more for this work, so salaries go up. Because higher wages make it more expensive to produce goods and services, the overall cost increases, so we now pay more for the same goods and services. This is what creates the inflationary pressure.
Some confusing issues also drive up the prices. There is the fact that workers now earn more money, so they themselves demand more goods and services. As demand increases, prices also increase. In addition to items that cost more because the cost of production has increased, there are fewer people to make goods, so there are actually fewer goods, which creates higher prices.
So why is this happening now? In addition to other factors, the unemployment rate is currently so low because many have left the labor market. This is called the “Great Resignation”. There’s been a lot of writing about why this happens, but some of the main recurring themes are things like salaries, lack of appreciation, lack of childcare, and lack of opportunity to work. ‘advancement.
I took you on this long journey to talk about one of the most boring things in the world that apparently has nothing to do with this month’s theme, but it turns out it does. Look at this. When inflation is high, the Federal Reserve steps in and raises interest rates. This throws the brakes on the economy by making it more expensive to buy things we have to use credit for and also encouraging people to save/invest instead of spend. That’s one way of doing it, but we could also try to encourage people to return to work.
During World War II, FDR instituted wage limits for workers to reduce the cost of war. Although this sounds terrible for the workers, it has benefited them in the long run. Because employers couldn’t offer higher wages to entice people to work for them, they began to offer all sorts of other types of benefits, from pensions to paid vacations. This lesson applies today. Obviously, workers want to be paid decently, but they also want to be respected and valued. Offering other types of benefits, like childcare, can help bring workers back in the door.
Despite the fact that we need more workers to meet our demand, we also want a more diverse workforce. The more diverse the workforce, the wider the range of customers that can be reached. Having a diverse workforce also means there is a wide range of perspectives to draw on. To attract this diverse group of workers and encourage people to come back in general, we could consider benefits for all kinds of families. We can ensure that we pay people fairly for equal work. We can honor people’s identities.
There is so much that the pandemic and the Great Resignation that followed have laid bare our society. The first is how dependent we all are on people showing up every day and how little our society values them. The American worker is incomparable. We need to value this in each other and embrace our diversity. The secret to a stable job market is to remember that we are all rainbows. Let’s treat each other accordingly.